Worried About Social Security Being There When You Retire – Learn the Facts and Be Prepared

Social Security is a bit of an enigma. It’s something we all know about, but most actually know little about it. We’ve been told for decades we can rely on it. So we’re in the habit of doing just that.

But now you start to hear what to many are troubling rumblings. Stories hinting that it may be running out of money. That it might not be there for you as you are getting ready to start utilizing it.

Now’s the time to learn what’s going on and what to expect.

Introduction                                                                                                              

You ever experienced that situation where there was something you had been told was a certainty that you could absolutely count on? You could take it to the bank.

We all have. In most cases when we hear promises of this nature our skeptical side takes over and we discount the message…ever the messenger.

Often that is actually the case. False claims and empty promises.

Yet, there are some situations and scenarios where the premise of absolute assuredness does seem true…and reliable.

The sun coming up tomorrow is probably the most important example of this to all of us. And that fact has yet to fail in its fulfillment each and every day, thankfully for each one of us.

Death and taxes… Unfortunately, the fact those are inevitable and unavoidable seems unquestionable true.

When it rains it pours. There’s never enough time. Life likes to throw you curveballs……

There’s actually many promises, maxims and beliefs we take as absolutes, ranging from good to bad. They are just true.

Social Security being there for you when you retire is definitely another.

You’ve played by the rules, contributed all those years and your government has promised you that you can rely on it being there for you when you do hang up your boots and retire.

Hmmm…

Not surprisingly, people are starting to hear rumblings…cracks in the armor seem to be forming and doubt seems to really be creeping in when it comes to believing Social Security will be there for you. As promised.

Today we are going to take on the issue of Social Security and whether you can count on it in your retirement.

How did Social Security come into existence?

Let’s start with the basics. We’ve all heard about Social Security, but it’s a fair bet that a sizable percentage of the population actually don’t know much about the history of the program.

According to the Social Security Administration (SSA),  President Roosevelt signed the Social Security bill into law on August 14, 1935. This was 14 months after first promising a program for social insurance as a safeguard “against the hazards and vicissitudes of life.”

The agency began collecting payroll taxes in 1935 according to the SSA, but Social Security wasn’t actually determined to be constitutional by the Supreme Court until 1937. In 1939 an amendment was passed to help fund the program – creating the Old-Age and Survivors Insurance Trust.

The agency reports that in 1940 there were 222,000 participants, which grew to over three million in 1949. Today Social Security covers a total of more than 67 million participants through their Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs. For sake of context in terms of growth, the total number of Americans covered in 1970 was just shy of 26 million people.

How SS taxes work

Compulsory contributions to Social  Security today are governed by the Federal Contribution Insurance Act (FICA), which was instituted in 1935. Assuming you are not self-employed, you will normally pay half and your employer pays the other half.

The total FICA tax is 15.3-percent in 2024, of which you are responsible for paying 6.2-percent of your earnings for Social Security and another 1.45-percent for Medicare, also known as Hospital Taxes, according to the SSA.

There is also an Additional Medicare Tax withholding rate that applies for Medicare wages that exceed a threshold amount based on the taxpayer’s filing status.

In 2024 that figure is $200k for single filers, $250k for joint filers and $125k for those married but filing separate.

Employers are responsible for withholding the 0.9-percent Additional Medicare tax (2.35 total – regular of 1.45-percent plus the 0.9-percent Additional Medicare) ) on an employee’s wages that are paid in excess of the aforementioned Medicare wages.

They must start to withhold in the pay period in which they pay wages in excess of the threshold figure, and continue to do so in each pay period until the end of the calendar year.

There is no employer match for the Additional Medicare tax.

There is a Wage Base limit that caps the maximum amount of earnings that are subject to the Social Security tax each year. In 2024 that basis is $168k. Keep in mind that there is no Wage Base limit for the Medicare tax, and that all covered wages are subject to the Medicare tax.

If you are self-employed you are responsible for the entire 15.3-percent FICA tax yourself, plus the Additional Medicare tax of 0.9-percent if your income exceeds the threshold. As a self-employed individual you can deduct the employer half of the FICA amount from your taxable income (adjustment), or 7.65-percent.

One last major point to understand regarding what you pay into Social Security is the fact that the money you and your employer pay as taxes into Social Security (or you yourself if self-employed) is not set aside for you personally. It is combined with other money to provide benefits for all eligible.

Why is Social Security running out of money?

Well, the primary issue boils down demographics and declining birth rates after the Baby Boomer period, which started in the wake of WWII, lasting from 1946 to 1964.

Simply stated, there are more people collecting Social Security than there are those working and paying into the program.

Baby Boomers as a group are continuing to retire and access the benefits in big numbers, which is projected to continue over the coming decade. They will continue to collect for many years thereafter. Meanwhile,  there aren’t enough younger workers paying into the program to replenish the Trust.

There are additional factors as well, such as inflation and interest rates, which further deplete both the Social Security Insurance and Medicare Insurance Trusts.

The current situation

The SSA has been assessing the issue of solvency, sustainability and budget impact for many decades, trying to ascertain how long the program could last based on funding from taxes. Their most recent report, the 2022 Trustee Report, found that starting in 2034 retirees would start receiving an estimated reduced benefit of 77-percent.

That finding is based on their belief that starting in that year, and assuming Congress takes no action between the time of the report and 2034, the Trust would no longer be considered solvent and cuts to benefits would have to occur. Their definition of solvency is the Trust’s ability to cover the full benefits of eligible Social Security participants.

If such a cut in benefits did occur (or some combination in benefit cuts and other actions), the report found that the Trust could last until the end of their long-range projection period, which ends in 2097.

Will benefits be available?

The SSA believes that if we continue on this route, with Congress unwilling to take action, starting in 2034 cuts to benefits will occur. With Social Security taxes contributed by working taxpayers at that time and moving forward, the Trust would be able to cover approximately 70-percent of scheduled benefits.

Bringing this all the way back around, in direct answer to the question of whether you would still be able to receive Social Security benefits after that date, yes, you will, but at a reduced estimated rate of 77-percent.

Yikes!!

Actions that could potentially avert a cut in benefits

Some of the primary solutions being bandied about include congressional legislation, such as:

• Lower benefits for all eligible participants
• Reduce or eliminate benefits for the wealthier
• Increase FICA taxes for all, or just the wealthiest
• Increase the retirement age
• Institute an eligibility adjustment based/scaled on income
• Combination of potentially any of these

 

While all of these seem to be solid ideas and make sense, the fact is the political parties have turned the entire issue….political

Both are afraid to talk about actions that can actually make a difference. Do so and they get accused by the other side of cutting benefits, which is basically political suicide at this time.

And so we are in a quagmire. On this path where something needs to be done or we face the reality that the Trust will be unable to meet it’s legal mandate of paying full benefits through the collection of FICA taxes.

The irony is that both sides claim there are protecting Social Security, when in fact this is leading us down the path of inevitability. As of now it’s been nearly 40 years since the last major reform, which says volumes about our chances of having congress do what is needed for everyone’s benefit.

What will happen if and when Social Security runs out?

Given you might be a bit stunned about now, it probably makes sense to restate this point:

Nothing is expected or projected to occur until 2034 at the earliest. There is still the real chance Congress may find some religion and step up…do the right thing.

If not, at that point the program won’t go away or run out of money. Instead, you may receive a reduced benefit. Right now that is expected to be approximately 77-percent.

With that clear, the fact is that were that to happen, you have roughly a decade now during which time you can start taking meaningful actions that could make all the difference.

The first thing you’d want to do is to reduce your dependency on Social Security income.

How?

Here’s several actionable tips to increase your income:

Maximize qualified contributions – Look at maximizing your annual qualified contributions for you and your spouse through IRAs and employer-sponsored plans, such as 401(K)s. There’s no longer an age limit for contribution to an IRA, as long as you have earned income for the year. The same holds true for a 401(K) or similar plan, as long as you remain employed.

Roth IRA – Consider a Roth IRA contribution if eligible under the annual contribution limits. The contribution is made on an after-tax basis so the interest earned on the account is tax free, unlike an IRA or 401(K) contribution where you will owe income taxes upon distribution and be subject to the requirement minimum distribution rule, or RMD. Roth IRAs are not subject to RMDs.

Roth conversion – You might even want to consider a Roth Conversion strategy. Although you pay the tax owed on funds you’re converting from a qualified account (e.g., 401(K), IRA) in the year of the event, the funds can then grow tax-free from that point forward. Again, the Roth IRA is not subject to RMD.

Guaranteed lifetime income – Consider a Fixed Income Annuity (FIA), which is a fixed annuity that is intended to provide principal protection combined with growth potential. You can participate in upside market gains with your funds tracking an equity index, such as the S&P 500, but your money is not directly invested in the market, so you don’t participate in market losses – you can’t lose your principal. And they come with lifetime income guarantees and other options for you and often your spouse.

The other thing you’d want to do is to increase the Social Security benefit you are eligible to receive (or have started receiving) up to that point. The higher that amount, the less you will feel the affect of the cut, if and when it happens.

How can you do that?

• Work longer. This can help to increase the average you’ve earned during the 35-years measured by the SSA, especially if you’re earning at or near your highest level ever at the end of your career.
• Maximize your annual earnings. Doing so increases you eventual annual Social Security benefit payments. The 2024 maximum contribution limit is $168k.
• Delay taking the benefit. Just as is the case currently, the earlier you start taking Social Security, your benefit is reduced. At age 62 it’s reduced approximately 30-pecent for life. Waiting to full retirement age, or even age 70, increases your payment considerably.

 

Conclusion

Obviously, this is not the kind of news anyone wants to hear. You’ve heard you can count on Social Security, believing as promised it will be there as long as you live.

Well, if you step back and take a moment, you should come to the conclusion that all is not lost. The sun will still rise tomorrow.

There is the very real chance that the powers that be, as inept as they often seem, can still make this right. The closer we get to 2034, the fear of failing will get stronger and may finally be the motivator that pushes both sides to work together and actually work to save Social Security benefits for you and everyone else.

But if that doesn’t happen, the fact is that Social Security won’t disappear. It will be there for you, albeit at a reduced level. Right now you should at least be aware of the possibilities and potential issues. And you will have had time to plan and make yourself ready.

Speaking of planning, it should be evident that you need a rock-solid retirement plan capable of dealing with this issue, as well as all others you will likely encounter as you and your family navigate retirement.

If you are currently utilizing a retirement plan (either your own or one created for you), our team would be happy to review it to determine if it is capable of really meeting your goals.

Or we can assist you by creating a retirement plan capable of helping you to retire with confidence. We can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover Social Security, taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!

 

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